Days Are Numbered for Duty-Free Shopping

The hardy folk of the wind-blasted bogs and harbors in northern Europe have for centuries looked to the sea to make their living, first as explorers and rumrunners and lately as purveyors of ferry transport and duty-free shopping.

But as Europe’s common market takes shape, with a single currency and vanishing borders, the days of tax-free perfume, liquor and cigarettes for travelers within the community are numbered.

So are as many as 140,000 jobs.

European Union leaders have refused to retreat from a 1991 decision to abolish duty-free shopping among the 15 member states after June 30, despite strikes and howls of protest from small businesses--like those in this fiord port near the border with Denmark--that face extinction this summer.

A last-chance appeal by German Chancellor Gerhard Schroeder and British Prime Minister Tony Blair has been promised at the EU summit beginning today in Berlin. But with the EU administration in Brussels in chaos since last week’s resignation of all 20 commissioners, the already thrice-rejected plea for another extension looks unlikely to succeed.

That is grim news in the depressed northern reaches of Germany, where unemployment hovers around 20% and much of the North Sea and Baltic ferry traffic depends on subsidies from duty-free sales income.

The cut-rate commerce can legally continue on journeys outside the EU--for instance, on flights and cruises to the United States--but costs will rise nonetheless for both tax-free merchandise and tickets for most means of transportation.

“Prices will have to go up for both passengers and cargo on those routes that manage to stay in business,” said Guenther Becker, head of the Foerde Reederei Seetouristik ferry line based here, which already has given layoff notices to 70% of its 550 employees. That is also the share of FRS business he expects to be scuttled over the next three months.

Becker and others whose businesses depend on duty-free shopping concede that offering tax breaks for internal EU travel would contradict the principles of a common market. But they argue that the economies of the member states will only be truly unified when there is a single tax code and new guidelines for assessing duties on cross-border purchases.

Britain’s Duty-Free Confederation, representing the largest group of tax-free goods purveyors in the EU, wants the status quo to prevail until a workable successor regime is in place.

“If there is no new system, a ferry making the trip from England to France would have to sell [a bottle of whiskey] at the British duty and VAT rate until halfway across the channel, and then at the French duty and VAT rate,” said Jacqui Crane, spokeswoman for the confederation. Thus, the same bottle could cost anywhere from $12.94 to $18.55, depending upon whether the ship is sailing to or from the good’s point of origin and where it is when the cash register rings.

The EU finance ministers have shown themselves to be badly split over the issue. Unanimous agreement is needed to overrule the commission’s deadline, and six countries remain opposed to an extension--Belgium, the Netherlands, Italy, Portugal, Finland and Denmark.

Consumer advocacy groups and inland retailers hail the impending demise of duty-free shopping within the EU, contending the practice robs government coffers across Europe of $2 billion in tax revenue each year and disproportionately benefits well-heeled businesspeople and other frequent travelers.

The Assn. of Consumer Organizations in Bonn supports abolition of such duty-free shopping on the grounds that the tax breaks benefit sellers more than customers.

“We’ve always argued that duty-free shopping isn’t such a good deal for the consumer. There is often not much difference in price for duty-free goods and those in shops where the seller pays taxes,” said Dirk Klasen, an economic analyst with the association. Some consumer studies in Germany have actually found duty-free outlets where goods are priced higher than at some inland stores.

“There is also a question of social justice: Why should prices be lower for air and ferry travelers and not for drivers or train passengers who are crossing borders?” he asked.

Duty-free advocates such as Becker contend the bulk of duty-free purchases are made by elderly passengers of modest means. Bus-and-ferry package tours selling for as little as $4 allow pensioners to take mini-vacations to the northern German beach communities in summer, where they support hotels, restaurants and fishing excursion services as well as the ferries, say duty-free proponents.

Across the EU, about 140,000 jobs are expected to disappear--theoretically to be more than offset in the long run by the increased economic activity spurred by free markets.

The Institute of Shipping Economics and Logistics in Bremen, Germany, calculates that 5,700 jobs in coastal communities in northern Germany are at risk if duty-free shopping is ended. Another 5,000 positions connected with airport duty-free sales in Germany also are threatened.

The expiration of duty-free sales within the EU will take its highest toll on heavily dependent communities such as this one and in towns surrounding major airports such as London’s Heathrow.

In Britain, as many as 30,000 jobs could be lost this summer, from airports and sea terminals to distilleries bracing for sharp sales declines in gin, Scotch and other whiskeys.

“Basically, duty-free can’t exist in a single market. We’re saying it isn’t a single market at the moment,” said Liz Tooke, spokeswoman for the British Airport Authority. “Let’s get rid of duty-free in an orderly manner.”

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Williams reported from Flensburg and Miller from London.